Better Wages, Better Workers

Although countless people believe that product prices and business expenses skyrocket in direct correlation to employee salaries, many companies prove the exact opposite is true.

By David Rolf

| January 2017

Long term, profits go way up when employee turnover is minimized; their productivity, commitment, and loyalty are heightened.Photo by Fotolia/ty

“The Fight for Fifteen: The Right Wage for a Working America” by David Rolf.Cover courtesy The New Press

The debate over minimum wage has been a long one in America’s recent history. Many employees cannot live on the salary afforded to them by their companies. So, now, more and more voices rise up, clamoring to be compensated more fairly for the work that they do. In The Fight for Fifteen(The New Press, 2016), David Rolf documents not only this ongoing battle for higher wages but also its various points and successes, compelling readers to understand that a simple fifteen dollars could be the first step toward better things.

Against The Stereotype: How American Companies Are Committing To Higher Wages and Still Succeeding

The conventional wisdom seems to be that many companies have no choice but to offer bad jobs. It’s globalization, it’s competition, it’s high input prices, it’s uncertainty, it’s the need to please the stock market, it’s poor demand ... It’s always something. Especially for retailers with business models that are all about low, low prices, jobs that pay low, low wages are just assumed to be part of the deal. Their hands are tied; they can’t raise prices or they’ll lose customers. So it’s easy to conclude that firms that offer higher wages can do so only because they cater to more elite clientele — their customers are willing to pay higher prices.

But according to a growing number of business experts like Zeynep Ton of MIT, the presumed conflict between employee compensation and low prices is a false one. High-performing companies like QuikTrip convenience stores and Costco wholesale clubs “not only invest heavily in store employees but also have the lowest prices in their industries, solid financial performance, and better customer service than their competitors,” says Ton. “They have demonstrated that, even in the lowest-price segment of retail, bad jobs are not a cost-driven necessity but a choice. And they have proven that the key to breaking the trade-off is a combination of investment in the workforce and operational practices that benefit employees, customers, and the company.”

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So it’s not just government policy that matters to wage growth, it’s changing our understanding of what makes a company successful. Decades of management philosophy has pointed toward labor as a cost to be minimized, never placing people on the “assets” side of the balance sheet. This is not just a choice (that can be reversed), it’s a poor choice for corporate growth and long-term profitability.

Let’s dig into some examples of this pro-growth, pro-worker strategy in action.

Costco Versus Walmart

The most talked-about example of a company that pays fairly, and is doing better economically, is Costco. Its primary competitor is Walmart, and the contrast between the two retailers is stark. A 2005 article in the New York Times even named Costco “The Anti-Walmart.” Discount retail is an extremely low-margin, highly competitive industry, with usual profit margins of 1 or 2 percent. But that’s where the easy similarities end between Costco and Walmart: the starting wage for Costco’s employees is 11.50 dollars an hour, and their average wage is nearly 21 dollars an hour. Walmart, meanwhile, pays its entry-level staff less than 9 dollars an hour and has an average wage of less than 13 dollars for nonsupervisory staff.

Given the large gap in employee compensation between the two, one might expect Costco to have lower profitability — but this isn’t the case. Costco’s investor returns from 2005 to the present have been almost five times those of Walmart. Its revenue has grown 52 percent from 2010–15, while Walmart’s revenue has only grown 18 percent.

And Costco’s market share may also be growing — with Costco’s membership fee revenue rising from 459 million to 528 million dollars in the year from 2013 to 2014, “it’s pretty clear,” said one commentator, “that a significant number of customers are moving over to the retailer to do their discount shopping.” Costco benefits from extraordinary customer loyalty, as well as employee loyalty: yearly employee retention rates are over 85 percent, and turnover for Costco employees who stay at least a year is just 5.5 percent. On Forbes’s list of the best companies to work for, it’s — surprisingly — a retail company, Costco, that takes the second-place spot (only Google is better rated).

Costco’s (relatively) high wages and generous benefits are intentional business decisions. Costco co-founder Jim Sinegal said in the New York Times that Costco’s higher productivity, better customer service, and lower employee turnover rates provide an advantage for Costco versus the competition. “This is not altruistic,” he said. “This is good business.” Costco’s pro-worker, pro-growth model took the national stage in 2013, when CEO Craig Jelinek wrote a public letter urging Congress to increase the federal minimum wage, saying, “We know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty.”

Over at Walmart, on the other hand, the policy has been to push wages down as far as legally possible. As Bob Ortega pointed out in his 1998 book In Sam We Trust, Walmart founder Sam Walton “deliberately used superficial forms of paternalism to gain the loyalty of his workers while keeping labor costs at rock bottom.” Ortega quoted Walton as saying, “We really didn’t do much for the clerks except pay them an hourly wage, and I guess that wage was as little as we could get by with at the time.” The companies’ attitude toward unions mirrors their stances on wages: fifteen thousand Costco workers belong to a union, while the federal National Labor Relations Board has repeatedly ruled against Walmart for interfering with workers’ right to organize.

Walmart’s wage policies have not only hurt its 1.4 million American workers, but its customers as well. Forbes nailed it: “Walmart service now pretty much sucks — and customers don’t like it.” Walmart’s poor customer service is directly related to its low wages, which result in high turnover and leave less experienced employees working the floor. Evidence also increasingly points to a direct relationship between wages and productivity — people work harder when they’re given a raise. Walmart also aggressively keeps its staffing ratios low, cutting employment by 1.4 percent even as it increased its store count by 13 percent. Is it any surprise that sales per employee at Costco are almost double those at Walmart’s Sam’s Club?

Costco’s high wages have translated into revenue and stock growth, while Walmart’s stingy policies have led it into a less competitive position relative to Costco. Journalist Dante Atkins writes on the difference between Walmart and Costco, “A minimum wage increase may interfere with a low-wage, low-satisfaction business model — but that doesn’t mean it interferes with the ability of businesses to be profitable.”

Quiktrip Versus Typical Gas Stations

An even more surprising example of a company succeeding — while treating its employees far better than the industry average — is Oklahoma-based QuikTrip, a chain of six hundred convenience stores and gas stations in twelve states. Convenience stores are a competitive, low-margin growth industry. But while most stores try to make do with as few workers as possible, QuikTrip prioritizes service, even maintaining a force of hundreds of floaters who can fill in for employees who get sick, are on vacation, or have an emergency. While the average convenience store worker makes 20,000 dollars a year, QuikTrip pays its fulltime store associates 40,000 dollars, including a yearly bonus, and adds a full suite of benefits, including vacation and sick time, 401(k) matching, profit sharing, and tuition reimbursement.

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While most retail chains skimp on training, entry-level hires at QuikTrip are trained for two full weeks before they start work, learning the QuikTrip way in everything from ordering merchandise to cleaning the bathroom. And while most convenience store employees are stuck in a dead-end job, most QuikTrip store managers are promoted from within, giving employees a reason to work hard. “They can see that if you work hard, if you’re smart, the opportunity to grow within the company is very, very good,” says company spokesman Mike Thornbrugh. The company even aggressively expands its stores to new areas to provide employees with a path to advancement: CEO Chet Cadieux notes that “without store growth, good employees will exit.” Cadieux’s commitment to staff shows in the company’s turnover numbers: in an industry with more than 100 percent yearly turnover, QuickTrip loses just 10 percent of its full-time employees every year and 30 to 40 percent of its part-timers.

An industry profile of QuickTrip (QT) by Convenience Store and Fuel News describes the customer service benefits of its policies: “One of QT’s longstanding secrets,” it said, “is its effervescent, clockwork chemistry. Its team of store associates routinely cover for each other, much like a veteran basketball team, whose members implicitly know where the other will be with nary a nod or gesture.”

QuikTrip’s excellent customer service has bolstered the chain’s sales, revenue, and growth: with revenue of 11.5 billion dollars per year, it is the twenty-seventh largest private company in the United States. When it comes to sales performance, QuikTrip is in a league of its own. Its store sales per square foot are 804 dollars, while the average convenience store chain makes only 522 dollars per square foot. QuikTrip’s sales per labor hour are 66 percent higher than those of an average convenience store chain, and 50 percent higher than even the average of the top quartile convenience store.

QuikTrip consistently shows up as a top employer on national ratings lists; it’s currently number 21 on Glassdoor’s national list of best places to work. Jim Fram, senior vice president for economic development for the Tulsa, Oklahoma, Chamber of Commerce, credits the chain’s above-average industry pay and the fact that QuikTrip promotes from within. “[Employees] have their anniversary date on their name badges,” Fram says. “You don’t see very many people who have worked there only a few months. They are all long-term employees.”

But QuikTrip’s high-road practices haven’t cost it anything in terms of competitiveness. As Convenience Store and Fuel News notes, “high wages didn’t stop QuikTrip from prospering in a hostile economic climate. While other low-cost retailers spent the recession laying off staff and shuttering stores, QuikTrip expanded.”

QuikTrip’s competitors are paying attention, which may mean that its model will spread to other chains. Jim Griffith, CEO of Oklahoma- based convenience store chain OnCue Express, calls QuikTrip “one of the best retailers in the country,” acknowledging that his chain looks to it for new ideas and inspiration. “I just think the world of them,” he says. “Someday maybe I can grow up and be QuikTrip.”

When it comes to QuikTrip’s culture of employee retention, Griffith said, “My hat is off to them. It takes a lot of work. Anytime you can reduce turnover, you reduce costs.” And in the cutthroat retail industry, cutting costs is the only game in town. It just turns out that also seeing labor as an asset, instead of just a cost, is key to winning it.

In-N-Out Versus The Fast-Food Industry

In-N-Out is a classic hamburger chain whose employees wear 1950’s-style red and white uniforms, and its wrappers and cups feature biblical quotes. It has also achieved a cult-like following, including the late Julia Child.

The fast-food industry doesn’t have many chains like In-N-Out. The reputation of fast food has tanked in recent years, with protests over low wages and scandals over food quality — think “pink slime” burgers. Founded in 1948 and family-run ever since, In-N-Out may not be a behemoth corporation like McDonald’s or Burger King — the chain has only 280 stores in five western states, and has long resisted both franchising and going public. But In-N-Out is profitable, with an estimated 625 million dollars in revenue last year and a 5 percent annual growth rate.

From the beginning, In-N-Out has chosen to pay high wages as part of its business model. Its founder Harry Snyder paid 1 dollar an hour (plus one burger per shift) when California’s minimum wage was 65 cents. The lowest-paid jobs at In-N-Out now average above 10 dollars an hour, with some nonmanagement jobs starting at more than 13 dollars an hour. Assistant managers average 51,200 dollars annually, or 25 dollars an hour. Full-time employees receive medical and dental benefits, life insurance, vacation and sick time, free meals, discounted gym memberships, and frequent raises.

And employees love working for In-N-Out. It is currently listed eighth on Glassdoor’s list of best places to work in the United States, and by Forbes as 2015’s second most attractive place to work in retail. A whopping 91 percent of employees on Glassdoor would recommend In-N-Out to a friend seeking employment. That’s pretty impressive for a burger joint.

Customers consistently rate In-N-Out as their favorite quick-serve restaurant. It’s loved even in areas of the country that are generally hostile to other fast-food companies like McDonald’s. Local business leaders in San Francisco’s local food mecca Fisherman’s Wharf opposed every other fast-food chain except In-N-Out, because the leaders “wanted to maintain the flavor of family-owned, decades-old businesses in the area” and residents would ordinarily “be up in arms about a fast-food operation coming to Fisherman’s Wharf.” But, they said, “This is different.”

Fairly compensated employees have helped make In-N-Out not only wildly popular with customers but highly profitable as well. Its revenue per hour is higher than Burger King, McDonald’s, and other fast-food chains. But almost all of McDonald’s wages hover near legal minimums, under 8 dollars an hour, with poor benefits. USA Today and 24/7WallSt.com have said that McDonald’s — more than any fast-food chain — was one of “eight companies that most owe workers a raise.”

Critics have fearmongered that if fast-food workers get a raise to 15 dollars an hour, future Big Macs will shoot up in price. Yet an In-N-Out cheeseburger costs about 2.20 dollars, French fries just 1.50 dollars — more evidence that claims of a “10-dollar Big Mac” are just another far-fetched anti-minimum-wage fantasy.

One of the reasons In-N-Out has chosen to grow slowly and retain control of its business operations has been to avoid compromising its quality or customer service by growing too fast; instead, its business practices have been noted for “employee-centered personnel policies.” In its case study of In-N-Out, business textbook Exploring Management notes that the firm treats “employees as long-term partners instead of disposable resources” and “prefers to focus on its formula for success instead of conventional definitions like shareholder returns or IPOs.”

In-N-Out, like QuikTrip, has chosen to make money by making employee retention a priority. Former CEO Rich Snyder said, “Why let good people move on, when you can use them to help your company grow?” Snyder instituted a system to professionalize management, including In-N-Out University and a limited growth strategy that would expand to new restaurants only as quickly as the internally cultivated management roster would allow. The result was “that many part-timers came for a summer job and stayed for a career.” When Snyder was planning to expand his chain in the 1980s, he sought the advice of a food industry consultant. The expert told Rich that if he slashed salaries, In-N-Out could save a “ton of money.” Snyder was infuriated, saying that it was exactly the kind of advice you would expect “from a guy who wears a suit and who thinks you don’t pay a guy who cooks hamburgers that much money.”

In-N-Out’s leaders knew from the beginning that the “guy who cooks hamburgers” was the key to well-run stores and happy customers in its restaurants. Seventy years later, In-N-Out isn’t just a place that customers and employees love but proof that taking the high road — even in fast food — can lead to sustainable profitability.